Birmingham-based Islamic Bank of Britain has warned the Bank of England’s recent slashing of interest rates to historic lows will mean it will take longer for it to reach break-even point.

The bank, which offers Sharia-compliant banking services for individuals and businesses, reduced its loss by 15 per cent to £5.9 million during the year ended December 31, 2008, down from £6.9 million in 2007. The bank put the reduction down primarily to growth in fee and commission income.

But despite its loss last year, Islamic Bank of Britain (IBB), which opened its first branch in 2004, saw customer numbers increased by 10 per cent to over 47,000 and deposits increased by 15 per cent to £158 million.

Islamic Bank of Britain commercial director Sultan Choudhury said he was pleased with the advances the bank had made last year.

“I think it’s an improvement across the key metrics. We reduced our losses but we are still in the initial phases of when you launch a bank and clearly we have a lot of fixed costs and need time to break even.

“Towards the end of last year and the beginning of this year the Bank of England benchmark rate came down significantly and that has impacted on all banks and that will impact us strongly in 2009.

“But apart from that, the balance sheet metrics such as financing and deposit growth have been quite encouraging.”

The bank launched several new products during the period, including a Sharia-compliant home purchase plan which is equivalent to a mortgage and a 60-day notice savings account which was launched in December 2008.

The bank said it was pleased to see the 60-day notice account attracting significant balances at a time where banks’ savings deposits in the UK in general were retracting.

Mr Choudhury said: “We have gone into two new products in a big way and they have been attractive to audiences other than Muslims. Our home purchase plan came at a time when there was a big withdrawal of a lot of home finance products, so it was a good news story that the Islamic Bank of Britain came into the market providing credit when others were moving out. We have had strong take-up of that because our product is quite competitive.

“The other product that attracts non-Muslim is the 60-day notice account.

“Clearly now it’s very hard to get a good rate for savings and this account was at three per cent for a while – it’s now 2.5 per cent which is still a good rate.”

“We have even had expats from Spain ringing us up about this – it has had phenomenal growth.”

In a statement on the London Stock Exchange, the bank said it expected 2009 to be a challenging year.

But it added: “However, the directors believe IBB will be well positioned to benefit from the eventual recovery particularly with a reinforced capital base.

“The bank will continue to focus on growth in lower risk secured customer finance funded by longer term deposits.

“We will continue to assess new and innovative products and services to enhance our customer offering.”

Reformists will struggle in the presidential race in Iran

AS IRAN heads towards presidential polls in June, the contest is shaping into something of a referendum on the nature of the Islamic Republic. Thirty years after the fall of the shah, pride in the revolution is tempered by a widely shared sense that it has gone astray. Yet views differ radically over what ails Iran’s hybrid theo-democracy. More Islam is what some want, with a reimposition of puritanism at home, and boldness in foreign affairs. Others demand more republic, with a widening of civic freedoms and a government focused on bringing worldly rewards rather than achieving eternal glory.

Outside these two groups, known as principlists and reformists, stands a third camp. Sizeable and growing, it shuns politics altogether, judging that the non-elected theocratic elements of the state have simply grown too strong to dislodge by constitutional means. With the principlists, led by President Mahmoud Ahmadinejad, currently dominant, any electoral challenge to their rule would need to mobilise not just reformists committed to the system, but large numbers of those fence-sitters.

One reformist candidate seen as having the potential to inspire Iran’s disillusioned sceptics was Muhammad Khatami, a soft-spoken and liberal-minded cleric who won successive, sweeping victories to serve as president between 1997 and 2005. But Mr Khatami abruptly withdrew from the race on Monday March 16th, citing fears that, with two other prominent reformists determined to run, the reformist vote would again split, as it did in 2005, allowing Mr Ahmadinejad to romp into office. Yet while Mr Khatami’s departure dims reformist expectations of a big voter turnout, it has not altogether extinguished hopes for change.

Seen by much of the world as abrasive and inflammatory, Mr Ahmadinejad has built a strong constituency inside Iran. Religious hardliners praise his personal piety and humility. Some nationalists like his toughness on domestic security and in foreign affairs. And Mr Ahmadinejad has tirelessly toured the provinces, dispensing cash, infrastructure projects and folksy homilies to woo the poor. Yet millions of Iranians chafe under irksome limits to their freedom and blame their country’s international isolation on bellicose posturing by Mr Ahmadinejad. His spendthrift ways, they charge, have stoked raging inflation and burned windfall profits from several years of high oil prices, leaving state coffers empty now that prices for Iran’s main export have collapsed.

The president’s critics include not just reformists and outright dissidents but many within the principlist camp. Crucially, to date, Mr Ahmadinejad has enjoyed the not-so-subtle backing of the supreme leader, Ayatollah Ali Khamenei, who during his 20 years in power has extended effective control over many institutions of state, including security forces, the judiciary and broadcasting monopolies. Mr Khamenei sees the incumbent president as a loyalist and ideological ally, yet is also sensitive to the danger that political polarisation poses to his Islamic regime.

This leads to speculation that the supreme leader may yet quietly promote a rival, but less controversial, principlist figure, such as Mohamed Qalibaf, who has proved himself a skilled administrator as mayor of Tehran, rather than Mr Ahmadinejad. Some leading principlists have also proposed a coalition conservative government that would dilute Mr Ahmadinejad’s role. Such quiet manoeuvring inside the principlist camp suggests a fear that either they, too, could find themselves split, or that the reformists will, despite Mr Khatami’s absence, actually succeed in galvanising new voters.

One of the remaining reformist candidates, Mir Hosein Mousavi, is seen as capable of attracting conservatives as well as liberals. Having served as prime minister during the traumatic 1980-88 Iran-Iraq war, he has shied away from politics since then, and so remains something of an unknown. While his strong revolutionary credentials and socialist economic leanings attract hardliners, Mr Mousavi has charged Mr Ahmadinejad with promoting the Islam of bigotry by purging government of skilled technocrats in favour of ideologues. His reformist rival, Mehdi Karroubi, a liberal cleric and former speaker of parliament, has also boldly attacked the incumbent. Mr Karoubi has been ridiculed for proposing to spread oil revenues through cash handouts to the public, but he won only slightly fewer votes than Mr Ahmadinejad in 2005, and claims, credibly, that suspicious polling irregularities accounted for much of the difference.

There will probably be much rough and tumble before voting takes place on June 12th. Given the principlists’ strong core of voters, their control of key institutions, and their well-tested skill at using them, the reformists face a tough battle. But the implications of either a markedly low voter turnout, or an outright upset, could give pause to conservatives.

In a guest article, Dani Rodrik argues for stronger national regulation, not the global sortTHE clarion call for a global system of financial regulation can be heard everywhere. From Angela Merkel to Gordon Brown, from Jean-Claude Trichet to Ben Bernanke, from sober economists to countless newspaper editorials; everyone, it seems, is asking for it regardless of political complexion. That is not surprising, perhaps, in light of the convulsions the world economy is going through. If we have learnt anything from the crisis it is that financial regulation and supervision need to be tightened and their scope broadened. It seems only a small step to the idea that we need much stronger global regulation as well: a global college of regulators, say; a binding code of international conduct; or even an international financial regulator.

Yet the logic of global financial regulation is flawed. The world economy will be far more stable and prosperous with a thin veneer of international co-operation superimposed on strong national regulations than with attempts to construct a bold global regulatory and supervisory framework. The risk we run is that pursuing an ambitious goal will detract us from something that is more desirable and more easily attained.

One problem with the global strategy is that it presumes we can get leading countries to surrender significant sovereignty to international agencies. It is hard to imagine that America’s Congress would ever sign off on the kind of intrusive international oversight of domestic lending practices that might have prevented the subprime-mortgage meltdown, let alone avert future crises. Nor is it likely that the IMF will be allowed to turn itself into a true global lender of last resort. The far more likely outcome is that the mismatch between the reach of markets and the scope of governance will prevail, leaving global finance as unsafe as ever. That certainly was the outcome the last time we tried an international college of regulators, in the ill-fated case of the Bank of Credit and Commerce International. A second problem is that even if the leading nations were to agree, they might end up converging on the wrong set of regulations. This is not just a hypothetical possibility. The Basel process, viewed until recently as the apogee of international financial co-operation, has been compromised by the inadequacies of the bank-capital agreements it has produced. Basel 1 ended up encouraging risky short-term borrowing, whereas Basel 2’s reliance on credit ratings and banks’ own models to generate risk weights for capital requirements is clearly inappropriate in light of recent experience. By neglecting the macro-prudential aspect of regulation—the possibility that individual banks may appear sound while the system as a whole is unsafe—these agreements have, if anything, magnified systemic risks. Given the risk of converging on the wrong solutions yet again, it would be better to let a variety of regulatory models flourish. But the most fundamental objection to global regulation lies elsewhere. Desirable forms of financial regulation differ across countries depending on their preferences and levels of development. Financial regulation entails trade-offs along many dimensions. The more you value financial stability, the more you have to sacrifice financial innovation. The more fine-tuned and complex the regulation, the more you need skilled regulators to implement it. The more widespread the financial-market failures, the larger the potential role of directed credit and state banks. Different nations will want to sit on different points along their “efficient frontiers”. There is nothing wrong with France, say, wanting to purchase more financial stability than America—and having tighter regulations—at the price of giving up some financial innovations. Nor with Brazil giving its state-owned development bank special regulatory treatment, if the country wishes, so that it can fill in for missing long-term credit markets. In short, global financial regulation is neither feasible, nor prudent, nor desirable. What finance needs instead are some sensible traffic rules that will allow nations (and in some cases regions) to implement their own regulations while preventing adverse spillovers. If you want an analogy, think of a General Agreement on Tariffs and Trade for world finance rather than a World Trade Organisation. The genius of the GATT regime was that it left room for governments to craft their own social and economic policies as long as they did not follow blatantly protectionist policies and did not discriminate among their trade partners. Similarly, a new financial order can be constructed on the back of a minimal set of international guidelines. The new arrangements would certainly involve an improved IMF with better representation and increased resources. It might also require an international financial charter with limited aims, focused on financial transparency, consultation among national regulators, and limits on jurisdictions (such as offshore centres) that export financial instability. But the responsibility for regulating leverage, setting capital standards, and supervising financial markets would rest squarely at the national level. Domestic regulators and supervisors would no longer hide behind international codes. Just as an exporter of widgets has to abide by product-safety standards in all its markets, global financial firms would have to comply with regulatory requirements that may differ across host countries.The main challenge facing such a regime would be the incentive for regulatory arbitrage. So the rules would recognise governments’ right to intervene in cross-border financial transactions—but only in so far as the intent is to prevent competition from less-strict jurisdictions from undermining domestic regulations.Of course, like-minded countries that want to go into deeper financial integration and harmonise their regulations would be free to do so, provided (as in the GATT) they do not use this as an excuse for financial protectionism. One can imagine the euro zone eventually taking this route and opting for a common regulator. The Chiang Mai initiative in Asia may ultimately also produce a regional zone of deep integration around an Asian monetary fund. But the rest of the world would have to live with a certain amount of financial segmentation—the necessary counterpart to regulatory fragmentation.If this leaves you worried, turn again to the Bretton Woods experience. Despite limited liberalisation, that system produced huge increases in cross-border trade and investment. The reason is simple and remains relevant as ever: an architecture that respects national diversity does more to advance the cause of globalisation than ambitious plans that assume it away.